reputation risk

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The most valuable asset in the capitalist economy is not cash, stock or buildings, but trust . . . It is curious, then, that tools and techniques proliferate for managing monetary risks, the art of protecting reputations is poorly developed and understood. Economist Intelligence Unit 2005

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Of all the risk classes, reputation risk causes both the most confusion and the least action. And yet, serious players have attributed the financial crisis, at least proximately, to reputation risk. What is going on (or not going on, as the case may be)?

The problem is that reputation risk is a secondary risk – it arises as a result of some other risk event – and amplifies the exposure of the firm to the primary event. The risk is transmitted to the reputation of the firm through the impact of the primary event on an audience (mostly, but not always, external) which then reflects the risk back on to the image and ultimately cashflows of the firm, usually via media exposure. In exceptional cases, the intermediate transmission mechanism is government response through direct sanction or increasing regulatory strictures.

In the case of government agencies, the impact is more diffuse; the image of the agency is tarnished, its credibility and authority diminished and ‘heads roll’.

Because it is a secondary risk, reputation risk cannot be managed directly as can other risks; the management approach must be more thematic. First, reputation is a major asset of the firm (albeit an intangible one), but very few firms have any measure of the actual value of the asset. That needs to change. Only through valuing the asset explicitly will the firm have any idea of the resources to commit to maintenance of the value of the asset when it is under threat. That requires a systematic approach to understanding the boundaries of the firm (the banking problem). Secondly, the firm needs an active programme of understanding and managing its reputation that is linked to the value-building strategies of the firm. That programme should – must – align to the firm’s communication strategies in each market and to each stakeholder group. Thirdly, the firm needs to have a practised approach to managing crises; it need to be trialled and kept current.

We assist firms in each aspect of the reputation risk challenge so that they will never be caught unprepared. As Pasteur observed, “chance favours only the prepared mind”.

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REPUTATION RISK IN BANKING

Clarifying reputation risk

Our submission to the Basel Committee on Banking supervision on proposed enhancements to Basel II covering reputation risk

REPUTATION INSTITUTE PRESENTATION

A new era for reputation risk in banking

Presentation (3 MB) to the 2009 global Reputation Institute conference examining the role of reputation in the financial crisis